An Actuarial Perspective on the 2011 Social Security ... · 32% of AIME in excess of $749 and less...

Copyright © May 26, 2011 by the American Academy of ActuariesAll Rights Reserved.

An Actuarial Perspective on the 2011 An Actuarial Perspective on the 2011 Social Security Trustees ReportSocial Security Trustees Report

Janet M. Barr, ASA, MAAA, EAChair, Social Insurance Committee

Stephen C. Goss, ASA, MAAAMember, Social Insurance Committee

Highlights from the report and policy options to address Social Security’s

long-term financial soundness

Copyright © May 26, 2011 by the American Academy of ActuariesAll Rights Reserved. 2

American Academy of ActuariesAmerican Academy of Actuaries

American Academy of Actuaries17,000-member professional association whose mission is to serve the public and the U.S. actuarial profession. The Academy assists public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the United States.


American Academy of Actuaries

Pension Practice CouncilProvides objective technical expertise to policymakers and regulators on pension and Social Security issues.

Social Insurance CommitteeProvides independent and objective analysis, advice, and education to stakeholders of social insurance plans with respect to:

FinancingAnnual reportingManaging system risksProgram Design

Copyright © May 26, 2011 by the American Academy of ActuariesAll Rights Reserved. 4 4

Agenda for TodayAgenda for Today’’s Briefings Briefing

Metrics for solvency and results of the 2011 Social Security Trustees Report

Options for reform

Current proposals


Key Questions

How have Social Security’s financial projections changed from last year?

What does it mean to say the system is not in actuarial balance?

What is sustainable solvency?

What are the implications of waiting to reform Social Security?

What are the options for reform?


MetricsMetrics——ShortShort--Range Test for Solvency Range Test for Solvency

Trust Fund Ratio =

Trust Fund assets at beginning of year ÷

Trust Fund costs during year

The short-range test is applied to the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds separately


MetricsMetrics——ShortShort--Range Test for SolvencyRange Test for Solvency

Based on the trust fund ratio:If the ratio is > 100% at the beginning of the projection period, then it must remain above 100% for the 10-year projection period, orIf the ratio is < 100% at some point during the projection period, then it must reach 100% within five years (without first reaching zero) and stay above 100% for the remainder of the projection period


MetricsMetrics——ShortShort--Range Test for Solvency Range Test for Solvency 2011 Results2011 Results

050100150200250300350400450

201020

1120

1220

1320

1420

1520

1620

1720

1820

1920

20

OASI 2010

DI 2010

OASI 2011

DI 2011

Trust Fund Ratios

% Benefits

Paid


MetricsMetrics——LongLong--Range SolvencyRange Solvency

1) Trust Fund ratios

2) Projected annual balance

3) Actuarial balance


MetricsMetrics——LongLong--Range SolvencyRange Solvency1) Trust Fund Ratios1) Trust Fund Ratios

Trends/Events to look for:Year of trust fund exhaustionStability during the periodTrend at the end of the period



2010 and 2011 Trust Fund Ratios

0%50%100%150%200%250%300%350%400%450%

2010 2012 2014 2016 2018 2020 2030 2036

2010

2011


MetricsMetrics——LongLong--Range SolvencyRange Solvency2. Projected Annual Balance2. Projected Annual Balance

Projected Annual Balance = Annual Income Rate - Annual Cost Rate

Expressed as a percentage of taxable payroll

Trends/Events to Look For:Year that Cost Rate exceeds Income Rate

The stability during the periodThe trend at the end of the period



2010 and 2011 Projected Annual Balance

‐5%

‐4%

‐3%

‐2%

‐1%

0%

1%

2010

2012

2014

2016

2018

2020

2030

2040

2050

2060

2070

2080

2010 Annual Balance

2011 Annual Balance



2011 Projected Annual Balance

‐14%‐12%‐10%‐8%‐6%‐4%‐2%0%2%

2011

2013

2015

2017

2019

2025

2035

2045

2055

2065

2075

2085

High

Intermediate

Low


MetricsMetrics——LongLong--Range SolvencyRange Solvency3. Actuarial Balance3. Actuarial Balance

Actuarial Balance =Summarized Income Rate - Summarized Cost Rate

Trust Fund Balance is included in Income Rate

Ending Target Fund included in Cost Rate

Expressed as a percentage of the summarized taxable payroll


MetricsMetrics——LongLong--Range SolvencyRange Solvency3. Actuarial Balance3. Actuarial Balance

Actuarial Balance

2010 2011

75–Year -1.92% -2.22%

2011 Actuarial Balance

Low Intermediate High

75–Year 0.29% -2.22% -5.59%


Sustainable Solvency

The Academy’s Social Insurance Committee believes any modifications to the Social Security system should include “sustainable solvency” as a primary goal

Sustainable solvency means that not only will the program be solvent for the next 75 years under the reforms adopted, but also that the timing of changes will result in stable trust fund ratios at the end of the 75-year period


Now is the Time to ActNow is the Time to Act

If reform is enacted now, participants will have time to plan for revised levels of benefits and/or after-tax incomeReforms can be phased-in more gradually over a longer period of time

In 2011, 75-year actuarial balance would require:Increase tax rate from 12.4% to 14.55%, or13.8% decrease in benefits

In 2036, 75-year actuarial balance would require:Increase tax rate from 12.4% to 16.45%, or23% decrease in benefits


Principles for ReformPrinciples for Reform

Are the principles on which Social Security was founded still appropriate or do changing times indicate a need for fundamental reform?Trade-offs:

Individual equity or social adequacy? Pay-as-you-go funding versus pre-funding?Means-tested or universality?

Opportunity to make changes based on the program’s fundamental principles rather than just the need to balance income and outgo


Design PrinciplesDesign Principles

Principle Reform Design ElementsIndividual Equity Tax increases paired with benefit increases,

individual accounts, automatic adjustments to Normal Retirement Age (NRA)

Social Adequacy Progressive formula for benefits, relate benefit levels to poverty level, minimum benefits

Benefit Adequacy More emphasis on tax increases rather than benefit decreases, minimum benefits, age retiree increases

Generational Equity Prefer pre-funding to pay-as-you-go funding, set taxes /benefits accordingly, automatic adjustments to NRA

Funding Uncertainty Automatic adjustments to benefits or taxesMinimize Trust Fund Pay-as-you-go funding, gradual more frequent

changes to benefits and/or taxes


Reform OptionsReform Options

To protect the program’s solvency, policymakers have a variety of reform options available, including:

Raising the Social Security normal retirement ageRaising the maximum taxable wage baseChanging the primary insurance amount (PIA) formulaChanging the cost-of-living adjustments (COLA)


Raising the Social Security Normal Raising the Social Security Normal Retirement AgeRetirement Age

Year of Birth

Current Law Social Security

Normal Retirement Age1943—1954 66

1955 66 and 2 months1956 66 and 4 months1957 66 and 6 months1958 66 and 8 months1959 66 and 10 months

1960 & older 67



Since 1940, life expectancy at age 65 for the general population has increased approximately 5 years

Past and scheduled increases in the normal retirement age have totaled two years

To index normal retirement age for future increases in life expectancy, the normal retirement age would increase about one month every two years



American Academy of Actuaries Position Statement Actuaries Advocate Raising Social Security’s Retirement Age (August 2008)

http://www.actuary.org/pdf/socialsecurity/statement_board_aug08.pdf

Life expectancy increases are uneven across the population

Working longer may not be possible for workers in physically demanding jobs


Raising the Taxable Wage BaseRaising the Taxable Wage Base

At the current taxable wage base (TWB) of up to $106,800 approximately 85% of earnings are subject to OASDI taxesHistorically 90% of earnings were subject to OASDI taxesA return to 90% would require approximately a 110% increase in the TWB plus annual increasesA gradual rise to 90% by around 2050 would eliminate approximately 35% of deficit* Limit applies to taxes and benefitsRemoving the TWB limit for taxes but retaining a TWB for benefits would eliminate 100% of deficit

*Based on the 2010 Trustees Report


Changing the PIA FormulaChanging the PIA Formula

PIA for those newly eligible in 201190% of first $749 of monthly average earnings (AIME)32% of AIME in excess of $749 and less than $4,51715% of AIME in excess of $4,517

“Bend points” increase with increase in average wages

Price indexing

Progressive price indexing

Longevity indexing


Changing the Cost of Living IncreaseChanging the Cost of Living Increase

Applied to retirement benefits beginning at eligibility

Based on Consumer Price Index for Urban Wage Earners and Clerical workers (CPI-W)

Historical average annual rate of 4.4% for 1969—2009

Chained CPI

Development of new index


Current ProposalsCurrent Proposals

National Commission on Fiscal Responsibility and Reform

Charged in April 2010 by President Obama to identify policies to improve the fiscal situation in the medium-term and to achieve fiscal sustainability over the long-termIssued the “Moment of Truth” report in December 2010 Recommended changes rely more on benefit reductions than tax increases


Current Proposals

Bipartisan Policy Center’s Debt Reduction Task Force

Issued the “Restoring America’s Future” report in November 2010Recommended changes rely more on tax increases than benefit reductions


National Commission on Fiscal Responsibility National Commission on Fiscal Responsibility and Reform and Reform

Index NRA and ERA to longevity, retain current ages for < 250% of poverty, partial index up to 400% of poverty

Add new bend point for AIME greater than median, from 90%, 32%, and 15% to 90%, 30%, 10%, 5%

Change to chained CPI in December 2011

Enhanced special minimum benefit relative to poverty level, pro-rated for service less than 30 years


National Commission on Fiscal Responsibility and Reform

Increases in 20th through 24th year after benefit eligibility

Increase TWB to 90% of covered earnings by 2049, establish new bend point for wages above TWB of 5%

Allow retirees to receive up to 50% of PIA at age 62 with actuarial reduction, remainder available at a later age


National Commission on Fiscal Responsibility National Commission on Fiscal Responsibility and Reformand Reform

Principle Reform Design ElementsIndividual Equity 1. Increase in NRA

2. Paired increase in TWB with a benefit increaseSocial Adequacy 1. Adjusted NRA for low earnings

2. Special minimum benefit for low earnings3. Tax increase for those earning more than

current TWBBenefit Adequacy 1. Increases to aged retirees

2. Adjustments to increased NRA if income is more than 4 times poverty level

Generational Equity Chained CPIFunding Uncertainty Automatic future increases to NRAMinimize Trust Fund Gradual increase in TWB


Fiscal Commission Impact Fiscal Commission Impact on Actuarial Balanceon Actuarial Balance

Provision Change in Actuarial Balance*

Percentage of Deficit Solved

Index NRA and ERA for longevity .34 18%Add new bend point .86 45%Chained CPI .50 26%Enhanced special minimum -.15 -8%Increase in 20th through 24th years -.15 -8%Increase TWB to 90% of covered earnings .67 35%Allow retirees to receive up to 50% of PIA at 62

0.00 0%

Total including misc. and interactions 2.15 112%

* Based on the 2010 Trustees Report


Bipartisan Policy CenterBipartisan Policy Center’’s Debt Reduction s Debt Reduction Task ForceTask Force

Subject all employer-sponsored group health insurance premiums to OASDI payroll tax

Increase TWB to 90% of covered earnings by 2049

Change to chained CPI in December 2012

Reduce the 15% PIA factor to 10% by 2052

Enhanced special minimum benefit relative to poverty level

Index PIA formula for longevity increases

Age 81–85 benefit increases

Tax reform for businesses

Tax reform for individuals


Bipartisan Policy CenterBipartisan Policy Center’’s Debt Reduction s Debt Reduction Task ForceTask Force

Principle Reform Design ElementsIndividual Equity Decrease in PIA related to longevitySocial Adequacy 1. Special minimum benefit for near poverty level

2. Tax increase for those earning more than current TWB

Benefit Adequacy 1. Focused more on tax increase rather than benefit decrease

2. Increases for aged retireesGenerational Equity Chained CPIFunding Uncertainty Automatic future decreases in PIAMinimize Trust Fund Gradual increase in TWB


Bipartisan Policy Center Impact Bipartisan Policy Center Impact on Actuarial Balanceon Actuarial Balance

Provision Change in Actuarial Balance*

Percentage of Deficit Solved

Increase TWB to 90% of covered earnings .60 31%Chained CPI .49 26%Tax employer group health insurance, Section 125 plans, FSAs

1.15 60%

Reduce the 15% PIA factor to 10% .07 4%Enhanced special minimum benefit -.09 -5%Index PIA for longevity increases .48 25%Age 81–85 benefit increase -.13 -7%Tax Reforms for Businesses and Individuals -.04 -2%Total including misc. and interactions 2.48 132%

*Based on the 2010 Trustees Report


Change in Benefits for Illustrative Workers Change in Benefits for Illustrative Workers Beginning Benefits at age 65 in 2030Beginning Benefits at age 65 in 2030

Earnings Group Fiscal Commission Bipartisan Policy CenterVery Low–8.1% of retirees 139% 91%Low–20.1% of retirees 106% 121%Medium–31.4% of retirees 87% 91%High–20.7% of retirees 73% 89%Maximum–5.4% of retirees 66% 85%

Proposal scheduled benefits as a percent of present law schedule benefit for a 30-year or more scaled earner


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An Actuarial Perspective on the 2011 Social Security ... · 32% of AIME in excess of $749 and less...

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